Egypt’s transition leaders face hard economic challenge

Strikes and protests have struck a blow to economy as inflation rises, lower expected growth from 5.7% to 1.5%.

By DAVID ROSENBERG / THE MEDIA LINE
Egyptian protesters with flags at pyramids 311 (photo credit: AP Photo/Amr Nabil)
Egyptian protesters with flags at pyramids 311
(photo credit: AP Photo/Amr Nabil)
Egypt’s transitional government – struggling to restorepolitical quiet after three weeks of turmoil – faces no less formidable achallenge trying to right an economy reeling from the combined impact ofshutdowns and strikes, as well as higher inflation and capital flight."
A survey of forecasters taken by The Media Line beforeunrest broke out saw Egypt’sgross domestic product on track to expand 5.7% in 2011. But David Cowan,economist at Citigroup Global Markets in London,now said the combined effect of lost output and higher inflation eating intopeople’s income will likely trim growth this year to 1.5%.
“That’s a significant falloff,” Cowan told The Media Line.“It would be very difficult to see growth become negative unless there is a waror something that really damages the economy. But at that rate you’ll be seeingstagnant incomes, because population growth is about 1.5%.”
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That will almost certainly complicate efforts by atransitional government to stabilize Egypt and lead the country intopromised elections later this year. Many Egyptians – 40% of whom live on $2 aday or less – are counting on the new regime to raise wages, create jobs andcontain soaring prices for food and fuel.
As the protests at Tahrir Square wind down, the country has become beset bystrikes by everyone from police and ambulance staff to textile workers andemployees of the Suez Canal. In a communiquéread out on state television on Monday, a spokesman for the Supreme Council ofthe Armed Forces called for “national solidarity” and criticized the strikes.
In addition, banks remained closed on Wednesday and are expectedto remain so on Thursday, the last day of the business week in Egypt. Therewas no word on whether they would reopen Sunday. The stock market has beenclosed for the past three weeks.
The tourism industry, which is Egypt’ssingle-biggest money maker, remains virtually shut down and unlikely to recoveruntil the unrest is over and political certainty returns, said Jean-Paul Pigat,head of Middle East and North Africa analysis, at Business MonitorInternational in London.
He estimated that Egypt’s GDP growth in the currentfiscal year, which ends in June, will slow to 3.2% from a previous forecast of5.1%.
Aside from domestic turmoil, Egypt’s economy faces theinflationary impact of climbing global prices for food and energy.
Higher petroleum prices will boost revenues from the Suez Canal, a major route for the world oil trade, andlift incomes and job prospects for Egyptians employed in the oil-rich Gulf,Cowan said. But steeper inflation will cut into people’s income, reducing theirpurchasing power, he said. He forecasted consumer prices rising to a 15%year-on-year rate by the end of 2011 from an average of 11% last year.
However, Pigat told The Media Line that the most seriousimmediate problem facing the government was the flight of capital out of thecountry.
Investors moved hundreds of millions of dollars out of thecountry on January 26 and 27, prompting the central bank to shut the country'sbanks for a week. Although Egypt'sCommercial International Bank (CIB) said on Tuesday its clients transferredabroad only 25% of what it had been preparing for, Pigat and other analystssaid the flow was likely to resume. The re-opening of the stock market couldboost it.
“It’s undeniable that capital is flowing out of the economy,which is one of the reasons they were forced to close the banks,” Pigat said.“That’s the biggest risk to the economy going forward. It has pronounced implications for balance ofpayment and Egyptian pound.”
In Egypt’sfavor, the central bank has $35 billion of foreign currency reserves, enough tocover seven months worth of imports. That, together with possible imposition ofcurrency controls, could prevent a severe depreciation of the Egyptian pound,Pigat said.
Click for full Jpost coverage of Egypt
Click for full Jpost coverage of Egypt
But otherwise, Egypt’s government will be strappedfor funds to address the economy. Before the outbreak of unrest, it was runninga budget deficit equal to 8% of GDP, which Moody’s Investors Service termed“stretched” when it cut the country’s credit rating January 31. Cowan said thatcould reach as much as 11% this year.

A fund manager, who spoke on condition of anonymity, toldThe Media Line that the kind of things the government needed to do in order toassuage protestors would be economically beneficial and require policies thatare business-friendly so as to encourage foreign direct investment (FDI).

“People in the streets are asking for three things – toimprove the poverty situation, for jobs and free elections,” the fund managersaid. “The first two are economic drivers – higher employment and more subsidiesfor basic needs. The government doesn’t have resources to boost subsidieswithout higher taxes. But, if they increase taxes, there will be less spendingand fewer job opportunities. That means they will turn to FDI.”

But Pigat said he was less optimistic because Egypt’smilitary is in control of the transition and might continue to wield power evenafter elections. The army owns vast swathes of the economy, including land,factories and tourism enterprises and will be loathe to cede it to the privatesector or to increased competition.

 “We don’t have anycertainty that any new government will be more business friendly or morewilling to push through business reforms,” Pigat said.